For retirement, Janet started saving $5,000 per year right out of college … the
ID: 2758867 • Letter: F
Question
For retirement, Janet started saving $5,000 per year right out of college … the day she turned 22. She saved annually with 12 annual contributions until her 33rd birthday and then stopped all contributions but let the money continue to grow at a 10% annual compound interest rate. Harry decided to postpone savings for retirement and did not start saving anything until his 34th birthday, but made 32 annual contributions of $5,000 to age 65, also earning 10% interest per year. Who is better positioned for retirementExplanation / Answer
For Janet Future Value of annuity =FV=A*[(1+k)^n-1]/k Where A =Annual amount=5000 k=10% pa n=12years FV= 5000*[1.10^12-1]/0.10 FV= $106,921.42 So Value of fund after 32 years =$106.921.42 The fund is invested for another 32 years @10% Maturity value at 65 years age =106,921.42*1.10^32 = $ 2,257,515.0 So Janet will have $2,257,515.0 at the age of 65 For Harry Future Value of annuity =FV=A*[(1+k)^n-1]/k Where A =Annual amount=5000 k=10% pa n=32years FV= 5000*[1.10^32-1]/0.10 FV= $1,005,689 So Harry will have $1,005,689 at the age of 65. Therefore Janet is better placed at retirement.